The Corporate Legal Landscape & its Landmines for the International Company Operating in the US, by Dawn E. Ely, Esq President Palladium Legal Services, LLC

The Corporate Legal Landscape & its Landmines for the International Company Operating in the US

By
Dawn E. Ely, Esq.
President Palladium Legal Services, LLC

Published in the Technology Association of Georgia Online White Papers: http://www.tagonline.org/articles.php?id=198

So, you’re a company headquartered outside North America and seeking to open a Regional Office in the US? Bringing the international culture to the US-based regional business is often a benefit, but the company should also be prepared for a perspective shift about corporate legal risks and lawyers upon entering the US business borders. Generally, most international companies view coming into the US as a financial endeavor – one with revenue, cost and tax implications. The US’ litigious society is world-renowned, but few international companies truly understand how easily they can get pulled into litigation until they actually begin operations here. The difference in the costs of corporate litigation between the US and most other countries derive from both the volume of litigation, as well as the value of the jury awards that are the standard in the US.

Not only are the corporate litigation costs significant and usually undervalued by many companies in coming to the US, but the role of lawyers in the US operations is often not greatly considered. Logically, most companies that have not experienced the US marketplace would anticipate getting pulled into litigation only in bona fide disputes and/or for providing a product or service negligently or of poor quality. Because this logic does not always hold true, minimizing the impact of any dispute or litigation filing is even more important in the US. In Europe (the countries in the European Union are referred to as the “EU”) the government is much more trusted than it is in the US, and as a result, the government is put in the position to settle many more categories of disputes than in the US.

So, instead of the private filing of lawsuits with little control or threshold for filing, as in the US, the EU government agencies will often handle the first level, and in many cases the entire scope of claims from private citizens. These are not always private, but they are far less expensive and are controlled by a regulatory agency process. Because of the limited role of juries in the claim and adversarial processes in the EU, the fines, penalties and other awards or disincentives are but a fraction of both the volume and dollar value as in the US. Therefore, the importance of ensuring that legal litigation and claims (including penalties, fines, and other damages) in the US are either eliminated entirely or minimized by creating such a strong legal case that it will be dismissed on a summary judgment motion by a judge before it gets to a jury is far greater in the US than in the EU. The question is, how do you do that? How do you know what you don’t know about from where your legal risks could arise?

In most European-based companies, lawyers are viewed as a resource required only when there is a perceived legal need. Lawyers outside the US are not usually considered as an integral part of the business and so do not participate in many of the day-to-day activities and decision making. They also are not historically part of the highest executive levels of management, such as an EVP or in the highest inner circle – instead typically functioning in executive management meetings as the “corporate secretary” to take notes and provide the attorney/client privilege benefits, but without the

One of the most critical technology risks to be aware of is the development of a company’s technology using third parties or independent contractors (any kind of non-employee). The presumption of ownership of the development created by a non-employee is that the technology is owned by the creator – in other words the contractor owns what the company retained him or her to do. With employees, the presumption is that all work done during and within the scope of the employment is for the benefit of the employer company and is owned by that employer-company. Not so with contractors. The words “work for hire” must be used in the contractor agreement in order to retain the ownership. It will likely go unnoticed by the business managers that any “work for hire” language that may initially be included in the contractor agreement gets changed to “contractor shall perform pursuant to company’s specifications” or the like. It will be even easier for the business managers to miss the fact that these words do not appear at all. In either event, the changing or absence of this language is very likely to loose the company ownership of that development work. This could be devastating to the company’s business objectives and strategic direction when the company is unable to secure a patent on that technology or when that contractor is able to sell that very same technology to a competitor.

Another example of how easy it will be for companies to step into legal landmines in their daily transactional contracts for products or services is the appearance of the term “best efforts” to describe the standard of performance for the company’s delivery of a product and/or service. Given that the business managers are customer service oriented, they naturally think “well, of course, I will do my best to deliver my product/service”. When, in fact, what the business managers don’t realize is that this term, “best efforts”, can be a legal designation under US law. That term may be interpreted to require that the business do anything and everything that is possible, and may not be limited to just that which is “reasonable”. Using the standard of “commercially reasonable” is the safest and most reasonable standard of performance. Without an in-house lawyer looking for these things in the daily transactions, the business is unlikely to catch this. Since the business is unlikely to retain an outside lawyer at premium hourly rates to review daily transactional documents, where they see no legal risk, having an in-house counsel – whether on a full time or part-time basis – is the best way to mediate these types of risks.

In addition to these issues that appear in every day situations, there are numerous other legal implications present when making strategic decisions about how to evolve or otherwise conduct business. For example, the approach a company takes to licensing its technology or treating its distributors can have antitrust implications. The ways in which a company may do business outside the US could create legal risks if done in the same way in the US. So, how does a foreign company know what it doesn’t know about the US legal issues it might face in doing business in the US and how to minimize those risks? The most reliable answer is to hire an in-house counsel – whether full time or part-time – so that the business managers don’t have to know what they don’t know, and they can focus on their core competency – the business. This may be contrary to the company’s culture, philosophy and business practices. However, operating in the unique legal culture of the US warrants what may be a unique approach to the business management team in the US. While not overly prevalent, there are part-time Chief Legal Officers available on a contract basis who could perform this role for those companies who are not ready to hire a full-time employed lawyer.

In seeking legal counsel, it is important that the lawyer not only know the relevant legal issues, but he or she must also know the company’s operations, objectives and obstacles in order to accurately translate in between the legal issues and the business’ operational setting. Legal advice has limited value if it cannot be made relevant to the particular business. In-house counsel is in a better position to know the business. While external firms will be valuable for expert knowledge in many areas, the business managers need to perceive they are facing a legal risk efore they pick up the phone to call an outside lawyer. An in-house counsel will be in a better position to learn the business for better translation and business-relevant legal advice and review of daily operational activities.

In summary, bringing the international culture to the US may be a valuable asset, but modifying business practices and perspective enough to accommodate for the unique legal environment in the US is a critical factor in any company’s success in initiating business in the US. Prevention is the key. A strategic legal partnership for the business will help a company navigate through the legal landmines in the US landscape.

Dawn Ely is a licensed attorney specializing in translating between the business and legal issues in a corporate in-house setting, providing Chief Legal Officer Services for companies. She has a particular specialty in technology issues with nearly a decade of experience in providing these legal services for international companies’ regional headquarters located in the U.S. and working with their respective global organizations. Ms. Ely is currently the President and founder of Palladium Legal Services, LLC offering part-time CLO services (www.palladiumlegal.com). She is also Of Counsel as the healthcare and technology specialist for Spell Pless Davis & Sauro, LLC, a law firm in Midtown Atlanta that specializes in, among other things, merger and acquisition transactions and business litigation, having international clients and strategic international law firm alliances located in the same offices. For further information, Ms. Ely may be contacted at d.ely@palladiumlegal.com.

This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States law. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.